Smart Estate Planning – How not to end up like James Gandolfini

The recent death of Sopranos star James Gandolfini was heartbreaking. He was just 51 and left behind a wife, young children and a career that promised even more fame and fortune.

I loved Gandolfini as an actor. I’m also impressed with him as an investor. Who doesn’t want to amass a $70 million estate?

But Gandolfini was a terrible estate planner. As a result of his flawed strategies, his family’s potential inheritance got whacked like a mob informant on The Sopranos. Gandolfini’s heirs just paid the IRS $30 million in taxes on that $70 million estate!

How did this happen? According to Gandolfini’s will, his two sisters each received 30 percent of his $70 million estate. (Yes, he was indeed the best brother in the world.) He left 20 percent to his baby daughter. And he left 20 percent to his wife, along with all his other assets, except his clothing and jewelry, which will go to his son, along with an insurance policy payout.

That all sounds nice. But Gandolfini made some mistakes that cost his family dearly — and offer important lessons for all us, even if we don’t have $70 million.

•An inheritance by a spouse – in Gandolfini’s case, his wife – is not taxable. At all. Mrs. Gandolfini could have inherited the entire $70 million tax-free. •Inheritances by a non-spouse (in this case, Gandolfini’s sisters, children and friends) are taxable on any amount exceeding $5.25 million. So the first $5.25 million of an estate is excluded – but the death or estate tax must be paid on any amount above that.

Estate planning laws are in place to help you minimize the tax burden on your heirs. So it’s important to speak with a financial advisor and, possibly, an estate-planning attorney about these important matters.

The most common way to minimize large estate taxes is through a mix of gifting assets while you’re alive, and insurance planning.

First, if you want to use life insurance proceeds to pay off estate taxes, you need a policy sufficient to pay off those taxes. The process involves setting up an Irrevocable Life Insurance Trust (ILIT) and gifting a fairly large amount of money to that trust to pay premiums.

The trust is a separate entity, so any transfers (above the allowable yearly amount of $14,000) will have to be reported to the IRS and eat in to your gift tax exemption, which is currently the same amount as your estate tax exemption: $5.25 million. Your gift into the trust is used to both pay the policy premiums and as an investment account that generates interest.

A family limited partnership is another way to protect your assets. When assets are placed into a business and are subject to different controlling interests, the value of the assets will change. So, a business interest worth $1 million with restrictions on how that interest may be used (e.g. invested, operated, sold, etc.) is no longer worth $1 million. This is the foundation for a family limited partnership.

Most people leave their assets to their children and other family members when they die. If you create a family limited partnership, you can basically convey part of that inheritance to those individuals now but still control those assets.

Most of us will never have to worry about what to do with $70 million. But there are a lot of people with estates in excess of $5 million or so. Remember: Your real estate or land holdings are included in the calculation of your estate value when you die.

Your loved ones will be bereft when you’re gone. Learn a lesson from the wealthy and well-intentioned James Gandolfini. Don’t compound their woes by making them pay more than is necessary to the IRS.